So, I have the log set to section 0, display all and I have the settings for that section to HIDE "Characters". Still, the NPCs spam it so much that I can't read party chat. And yes, I mean the Ally story NPCs.

Did I do something incorrect?

grey text is considered system, and cannot be silenced. if you somehow managed to, but it's still showing, then you'll have to report it as a bug. There is a report bug on the support site. GMs won't always reply to bug reports, if ever. Just like any other MMO.

I said character text..... like Melfonseane or Afin.

I dont think you can, to be honest it feels like the disable auto chat from showing on your log option should do this, as that's what the NPCs are doing but it doesn't.